Trey NovosadTrey Novosad

Valuation of Industrial PropertiesFor Ad Valorem Tax Seminar

February 8th – 10th

San Antonio, TX

Legislative HistoryLegislative History 1993 voters approved Proposition 21993 voters approved Proposition 2

§ 1-1 added to Article VIII of the Constitution§ 1-1 added to Article VIII of the Constitution 7373rdrd Legislature passed HB 1920 Legislature passed HB 1920

Added § 11.31 to tax codeAdded § 11.31 to tax code 7777thth Legislature passed HB 3121 Legislature passed HB 3121

Established an appeals process 11.31(e)Established an appeals process 11.31(e) Granted the commission authority adopt implementation rules 11.31(g)Granted the commission authority adopt implementation rules 11.31(g)

Commission established rules; Title 30 TAC §17Commission established rules; Title 30 TAC §17 8080thth Legislature passed HB 3732 Legislature passed HB 3732

Added COAdded CO22 to qualifying list 11.31(b) to qualifying list 11.31(b) Created nonexclusive list of 18 items 11.31(k) Created nonexclusive list of 18 items 11.31(k) Nonexclusive list must be reviewed every three years 11.31(l)Nonexclusive list must be reviewed every three years 11.31(l) 30 days to make determination for section (k) applications 11.31(m)30 days to make determination for section (k) applications 11.31(m)

8181stst Legislature passed HB 3206 & 3544 Legislature passed HB 3206 & 3544 Rules for making determination apply to all applications 11.31(g-1)Rules for making determination apply to all applications 11.31(g-1) Established a permanent advisory committee 11.31(n)Established a permanent advisory committee 11.31(n)

History of the CommissionHistory of the Commission

Gary McArthur Office of the Chief Gary McArthur Office of the Chief Engineer retiredEngineer retired

Glenn Shankle, Executive Director retiredGlenn Shankle, Executive Director retired Replaced by Mark Vickory June 2008Replaced by Mark Vickory June 2008

Three New Commissioners AppointedThree New Commissioners Appointed Buddy Garcia appointed January 2007Buddy Garcia appointed January 2007 Carlos Rubinstein appointed August 2009Carlos Rubinstein appointed August 2009 Bryan Shaw, Ph.D. appointed September 2007; Bryan Shaw, Ph.D. appointed September 2007;

current chairmancurrent chairman

IssuesIssues

Heat Recovery Steam Generators “HRSG”Heat Recovery Steam Generators “HRSG”

Low sulfur gas and diesel hydrotreatersLow sulfur gas and diesel hydrotreaters

Brine storage pitsBrine storage pits

Advisory CommitteeAdvisory Committee

Heat Recovery Steam Generator Heat Recovery Steam Generator “HRSG”“HRSG”

Heat Recovery Steam Generator Heat Recovery Steam Generator “HRSG”“HRSG”

HRSG ApplicationsHRSG Applications

Listed on nonexclusive list 11.31(k)Listed on nonexclusive list 11.31(k)$2.6B total cost on applications$2.6B total cost on applicationsHRSG and Enhanced Steam Turbines HRSG and Enhanced Steam Turbines

includedincludedRequested partial percentages on initial Requested partial percentages on initial

applications ranged from 13% to 100%applications ranged from 13% to 100%

HRSG Industry PointsHRSG Industry Points ““It’s on the list”It’s on the list”

Not required to use Tier III calculationNot required to use Tier III calculation Reduces lbs NOx/MWhReduces lbs NOx/MWh Applicants submitted multiple calculationsApplicants submitted multiple calculations

Theory of substitution; compared cost to simple cycle Theory of substitution; compared cost to simple cycle with SCRwith SCR

15 to 25 percent exemption requested15 to 25 percent exemption requested Efficiency-based outputEfficiency-based output

35 to 65 percent exemption requested35 to 65 percent exemption requested Output-based emissionsOutput-based emissions

100 percent exemption requested100 percent exemption requested

Application IssuesApplication Issues Executive Director “ED” responded uniformlyExecutive Director “ED” responded uniformly

Issued 100% positive use determinations on 26 HRSG unitsIssued 100% positive use determinations on 26 HRSG units Issued negative use determinations on 26 Enhanced Steam Issued negative use determinations on 26 Enhanced Steam

Turbine applicationsTurbine applications Stated that it did not use any of the applicant’s proposed Stated that it did not use any of the applicant’s proposed

calculations to arrive at its conclusioncalculations to arrive at its conclusion Appraisal districts filed appeals on 6 use determinationsAppraisal districts filed appeals on 6 use determinations

HRSG units produce a product; steamHRSG units produce a product; steam Steam turbines produce a product; electricity Steam turbines produce a product; electricity HRSG and steam turbines would be built without NOHRSG and steam turbines would be built without NOxx regulation regulation If HRSG qualifies, what about wind, nuclearIf HRSG qualifies, what about wind, nuclear

TCEQ put all pending and new applications on holdTCEQ put all pending and new applications on hold

HRSG Application StatusHRSG Application Status

Four CategoriesFour CategoriesGranted, not appealed by CADGranted, not appealed by CADGranted, appealed by CADGranted, appealed by CADOn hold at staff levelOn hold at staff levelPre/Post January 2009 & 11.31(g-1)Pre/Post January 2009 & 11.31(g-1)

Appraisal district appeals expected to go Appraisal district appeals expected to go to hearing in Spring 2010to hearing in Spring 2010

Refinery HydrotreatersRefinery Hydrotreaters

Hydrotreater BackgroundHydrotreater Background

New EPA rules required significant New EPA rules required significant reductions in sulfur contained in the reductions in sulfur contained in the domestic fuel supplydomestic fuel supply

Refiners installed hydrotreaters to meet Refiners installed hydrotreaters to meet new low sulfur specificationsnew low sulfur specifications

Hydrotreater ApplicationsHydrotreater Applications

January 2007, Valero filed 10 Tier II January 2007, Valero filed 10 Tier II applications applications

April 2007, ED issued notices of deficiencyApril 2007, ED issued notices of deficiencyApril 2007, ED issued negative use April 2007, ED issued negative use

determinationsdeterminationsMay 2007, Valero appealed ED’s May 2007, Valero appealed ED’s

determinationsdeterminationsJanuary 2010, appeal goes before January 2010, appeal goes before

CommissionCommission

HydrotreatersHydrotreatersCommissioner’s HearingCommissioner’s Hearing

Are the hydrotreaters required by law?Are the hydrotreaters required by law? Is Valero a producer of pollution control Is Valero a producer of pollution control

equipment?equipment?Are hydrotreaters production equipment?Are hydrotreaters production equipment?Do the hydrotreaters provide a “benefit at Do the hydrotreaters provide a “benefit at

the site”the site”

HydrotreatersHydrotreatersCommissioner’s OrderCommissioner’s Order

Portions of hydrotreaters were installed to meet Portions of hydrotreaters were installed to meet E.P.A. low sulfur requirementsE.P.A. low sulfur requirements

Hydrotreaters may provide a partial Hydrotreaters may provide a partial environmental benefit at the site in satisfaction environmental benefit at the site in satisfaction with the requirement found in the Commission’s with the requirement found in the Commission’s rulesrules

Set aside the ED’s Negative Use Determinations Set aside the ED’s Negative Use Determinations and remand the applications to the ED for new and remand the applications to the ED for new use determinations consistent with the use determinations consistent with the Commission’s statements and rulesCommission’s statements and rules

Brine Storage PondBrine Storage Pond

Brine Storage PondBrine Storage Pond

Brine Pit BackgroundBrine Pit Background

Mount Belvieu Caverns, LLC “MBC” Mount Belvieu Caverns, LLC “MBC” (Enterprise Products) operates storage (Enterprise Products) operates storage caverns in Chambers Countycaverns in Chambers County

Brine water is used to operate the storage Brine water is used to operate the storage facilityfacility

2007 MBC built a storage pond to store 2007 MBC built a storage pond to store brine waterbrine water

Brine Pit ApplicationsBrine Pit Applications

2008 MBC filed Tier I application for $23M2008 MBC filed Tier I application for $23M Included pond, lining, instrumentation, Included pond, lining, instrumentation,

transfer pump, pipingtransfer pump, pipingMay 2008 ED issued Negative Use May 2008 ED issued Negative Use

DeterminationDeterminationMBC appealedMBC appealedDecember 2008 Commissioners heard December 2008 Commissioners heard

appealappeal

Brine Storage PondBrine Storage PondCommissioner’s HearingCommissioner’s Hearing

Are the Brine Pits on the ECL Part “A” list?Are the Brine Pits on the ECL Part “A” list?Was the equipment installed to meet or Was the equipment installed to meet or

exceed an environmental rule and/or law?exceed an environmental rule and/or law? Is the application being treated equitably?Is the application being treated equitably?Does the equipment provide an Does the equipment provide an

environmental “benefit at the site”’?environmental “benefit at the site”’?

Brine Storage PondBrine Storage PondCommissioner’s OrderCommissioner’s Order

Uphold ED’s Negative Use DeterminationUphold ED’s Negative Use DeterminationMBC filed suit in Travis County District MBC filed suit in Travis County District

CourtCourtOnly 2Only 2ndnd case to challenge Commission case to challenge CommissionWhat will be the Standard of Review?What will be the Standard of Review?

4 Big Issues4 Big Issues Heat Recovery Steam Generators “HRSG”Heat Recovery Steam Generators “HRSG”

CAD administrative appeal scheduled for Spring 2010CAD administrative appeal scheduled for Spring 2010

Low sulfur gas and diesel hydrotreatersLow sulfur gas and diesel hydrotreaters Remanded to ED for further reviewRemanded to ED for further review

Brine storage pitsBrine storage pits Pending in Travis County District CourtPending in Travis County District Court

Advisory CommitteeAdvisory Committee 11stst scheduled meeting February 25 scheduled meeting February 25thth

Review ECL list and propose rule changesReview ECL list and propose rule changes

References & ResourcesReferences & ResourcesApplication instructions “RG 461” including ECL (Effective Sept 2009)

http://www.tceq.state.tx.us/assets/public/implementation/tax_relief/rg461_program_guidelines.pdf

HRSG TCEQ applications

http://www.texas.sierraclub.org/temp/Tier4/tier4.htm

Mont Belvieu Caverns Brine Pit Documents

http://www7.tceq.state.tx.us/uploads/eagendas/Agendas/2008/12-10-2008/Belvieu.pdf

Valero Refining Hydrotreater Documents

http://www7.tceq.state.tx.us/uploads/eagendas/Agendas/2010/1-13-2010/valero0724&0740.pdf

2010 advisory committee information

http://www.tceq.state.tx.us/implementation/air/taxrelief/advisory_group.html

Ronald Hatlett. TCEQ Tax Relief Program. 512-239-6348. txrelief@tceq.state.tx.us

Rick Fine. Managing Director. Duff and Phelps. 512-671-5500. rick.fine@duffandphelps.com

Edward Kliewer III. Sr. Counsel. Fulbright & Jaworski.. 210-224-5575. ekliewer@fulbright.com

Gregory Kort. Director. Popp, Gray, and Hutcheson LLP. 512-473-2661. greg@property-tax.com

Gregory Maxim. Director. Duff and Phelps. 512-671-5500. gregory.maxim@duffandphelps.com

Parker Wilson. Managing Counsel. Valero Energy. 210-345-5894. parker.wilson@valero.com

Bonus – Wells Fargo/TCADBonus – Wells Fargo/TCAD ED issued positive use determination on parcels not covered by apartment ED issued positive use determination on parcels not covered by apartment

complexcomplex TCAD appraised exempt parcels at discounted valueTCAD appraised exempt parcels at discounted value WFC filed suit in District Court challenging the application of the exemptionWFC filed suit in District Court challenging the application of the exemption Trial court issues order for TCAD to apply TCEQ determinationTrial court issues order for TCAD to apply TCEQ determination TCAD does not appeal court orderTCAD does not appeal court order WFC files MSJ claiming TCAD did not follow orderWFC files MSJ claiming TCAD did not follow order

Ask for sanctions and attorney’s feesAsk for sanctions and attorney’s fees Trial court grants MSJ in favor of WFCTrial court grants MSJ in favor of WFC

Grants sanctions equal to total tax for entire property plus feesGrants sanctions equal to total tax for entire property plus fees Issue with order being ambiguous and could exempt entire propertyIssue with order being ambiguous and could exempt entire property TCAD appealed SJTCAD appealed SJ Appellate court upheld order based on fact that TCAD had not appealed the Appellate court upheld order based on fact that TCAD had not appealed the

original orderoriginal order